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Emerging Markets: Russia

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The Russian economy continued to show signs that it was coming out of recession, as GDP posted growth of 0.5% compared with June on a seasonally adjusted basis and investment in July grew for the first time since the onset of the economic crisis. But GDP was still down by 10.2% year-on-year over the first seven months of the year, and government officials—in contrast to the airy, and misplaced, optimism early this year—have stressed that the economy has yet to definitively turn the corner.

The Russian banking sector has done little to contribute to the signs of recovery, as data released in mid-August showed that overall bank lending remained flat through mid-year, highlighting government concerns that a lack of lending growth could stifle any nascent recovery. The Russian government has used a wide range of measures to boost lending, including launching loan guarantee programs, cutting refinancing rates, setting aside large (and increasing) sums to recapitalize banks (including a $5.8 billion recapitalization of state bank VTB) and de facto capping of lending rates. Meanwhile, non-performing loans (NPLs) have more than doubled since the end of 2008, to 5% as of the end of June, under (infamously lax) Russian accounting standards. Some state banks are forecasting at least another doubling of rates of NPLs by the end of the year.

The assets of real estate developer Mirax, including a landmark office building in what was to be Moscow’s center of finance and Russia’s answer to Wall Street and Canary Wharf, were frozen as the company failed to repay a loan. The country’s state banks have in effect also become some of the largest real estate developers, as a sharp decline in real estate prices and an evaporation in demand has pushed many developers into bankruptcy.

An accident in mid-August at the Sayano-Shushenskaya hydroelectric plant—Russia’s largest—in southern Siberia killed several dozen workers and will cost hundreds of millions of dollars to repair. Aluminum giant Rusal, which received nearly three-quarters of the plant’s output, will likely face higher costs and power shortages.